Studies have shown that the greatest part of America’s wealth lies with family-owned businesses. In fact, family firms comprise the vast majority of all businesses in North America. It has been estimated that 40.3% of those family business owners expect to retire within the next several years and 70% of those family businesses owners indicate the desire to pass on the business to the next generation. These statistics should be a wake-up call to all family business owners desiring to have the family business continue across generations. Forming a Family Trust Company (“FTC”) can bridge the gap between what family business owners want for the future and what is actually happening in the family today.

Now recognizing the need to understand the basics of an FTC, let’s consider the formation, operation, and governance of an Ohio FTC. Ohio allows both licensed and unlicensed FTCs, although for fiduciary protection most unlicensed FTCs adhere to a majority of the licensed requirements. The decision as to whether to form a licensed or unlicensed FTC depends on the needs of the particular family, as well as the clients to be served by the FTC.  Unlicensed FTCs are not regulated or audited by state banking regulators while a licensed FTC will be audited regularly by state banking regulators. Some families may prefer having this added degree of external oversight. Another determinative factor in the licensed versus unlicensed discussion is understanding who the FTC seeks to serve.  A licensed FTC has a slightly broader definition of who can be considered a Family Client, as defined in the Ohio Family Trust Company Act.  However, both licensed and unlicensed FTCs can serve family members, defined to include lineal descendants, spouses/spousal equivalents, adopted children, stepchildren, and foster children, of a Designated Relative. In addition to the Family Members outlined above, the following are allowable clients while still being an unlicensed FTC:

• Former Spouses
• Key Employees
• Estates of Family Clients
• Charitable Entities with all contributions coming from Family Clients
• Irrevocable Trusts funded by Family Clients with defined current beneficiaries
• Revocable Trusts with Family Clients as grantors
• Business entities owned and for the benefit of Family Clients

Legal formalities of a licensed FTC include, but are not limited to: completing an application and submitting it to the Ohio Division of Financial Institutions with a $5,000 application fee; maintaining office space in Ohio; maintaining a fidelity bond of not less than $1M; securing directors and officers insurance of not less than t$1M; and pledging to the Ohio Treasurer $100,000.  An FTC must also maintain capital of at least $200,000, but not more than $500,000. An Ohio FTC must perform at least three of its trust activities in Ohio as well.  Further, the Board is required to have a minimum of three directors, with at least one being an Ohio resident. The Ohio Department of Financial Institutions will audit the activities of a licensed FTC not later than 18 months after receiving its license and thereafter at least every 36 months. The only statutory requirement for an unlicensed FTC is submitting an annual affidavit with minimal information to the Ohio Department of Financial Institutions. 

Once formed, an FTC operates similarly to a “regular” commercial trust department or institution. The governance structure of an FTC typically consists of the following components:  Board of Directors (comprised of family members as well as Independent Directors), Distribution Committee(s), Investment Committee and an Amendment Committee.  However, an FTC is very flexible in responding to the specific ‘personality’ or needs of an individual family. For example, additional committees could include:  Education Committee, Family Business Asset Committee, Engagement Committee, Philanthropy Committee, or Entrepreneurial Committee. These Committees were created in response to specific needs of a family for the oversight of the family business asset, education of family members on a wide range of topics, and the planning of ‘family glue’ events to harmonize the family. Designing the structure of an FTC responding to the unique challenges of each family can be key to the long-term success of the FTC.